BOJ Firepower Fizzles as Currency Market Dares Japan to Act

  • Yen’s surge this year has pushed it past 100 per dollar twice
  • Bank of Tokyo-Mitsubishi, Morgan Stanley see further gains

Redeker: FX Inflexibility Behind Yen-Dollar Move

Foreign-exchange traders are becoming increasingly confident that the Bank of Japan won’t stand in the way of further yen strength after the currency surpassed 100 per dollar for the second time this year.

QuickTake Abenomics

Strategists at Bank of Tokyo-Mitsubishi UFJ Ltd. and Morgan Stanley see the yen extending this year’s almost 20 percent gain versus the dollar, further confounding policy makers who are seeking to spur growth and inflation in the world’s third-largest economy. As the currency surged Tuesday, Japanese Vice Finance Minister Masatsugu Asakawa said he’s watching with concern to see if there are speculative moves in the foreign-exchange market.

Forecasters who started 2016 predicting yen weakness have had to revisit calls predicated on Japan’s ability to use rhetoric, monetary stimulus and quantitative easing to stymie the currency’s advance. Efforts that would typically weaken the yen have proven largely ineffective this year, signaling that the BOJ may have run out of room to maneuver. At this point, the yen’s strength appears to fall short of levels where the BOJ would consider entering the market to sell yen -- a step that hasn’t happened since 2011 -- according to Mizuho Bank Ltd.

More Jawboning

“The verbal warnings will get stronger until something nearer 90, which might induce some form of physical intervention,” said Neil Jones, head of hedge-fund sales at Mizuho in London. “It is very unlikely that they will unilaterally intervene at current levels.”

The yen touched 99.54 per dollar Tuesday, the highest since June 24, the day after the U.K. voted to leave the European Union. It slid 0.4 percent to 100.67 as of 8:12 a.m. in New York after Asakawa said Japan will have to act if there are extreme moves in the foreign-exchange market, and that it’s in close contact with other Group-of-Seven nations.

Yen strength is underpinned by a pullback in Japanese inflation expectations, said Lee Hardman, London-based currency strategist at Bank of Tokyo-Mitsubishi UFJ. That decline in the inflation outlook enhances the allure of Japanese bonds, according to Hans Redeker, the head of global foreign-exchange strategy in London at Morgan Stanley.

"The result of that is real rates in Japan go up on a relative basis and it has been the real-rate differential driving dollar-yen to this decline below 100," Redeker said in an interview on Bloomberg Television.

Mr. Yen

The foreign-exchange level is a concern for Japan’s policy makers because it threatens to wipe out the effects of more than three years of central-bank stimulus, which a year ago sent the currency to its weakest level since 2002.  Toyota Motor Corp. is among companies to have warned about the impact of a stronger yen on earnings.

The currency has been whipsawed this year. It plunged when the BOJ unexpectedly introduced negative interest rates in January, surged on safe-haven demand after the U.K.’s Brexit vote in June, and rose again last month after the central bank refrained from expanding government-bond purchases.

The BOJ’s threshold for intervention is between 90-95, former Japanese vice finance minister Eisuke Sakakibara said in an interview earlier this month. The 75-year-old was dubbed “Mr. Yen” for his ability to influence the exchange rate in the 1990s.

The nation intervened in currency markets three times in 2011, selling 14.3 trillion yen ($142 billion) in an effort to halt gains that drove the exchange rate to a peak of 75.35 per dollar and contributed to the country’s first annual trade deficit in three decades. The yen still ended 2011 as the best performer among developed-nation currencies.

For a primer on BOJ intervention, click here.

Central banks historically consider three ways to address unattractive foreign-exchange levels: verbal comments to steer exchange rates, unilateral intervention to buy or sell the currency or coordinated action with other major nations. While it’s likely that policy makers will make more public statements about yen levels, there are high hurdles for the second and third options, according to Jeremy Cook, chief economist at London-based World First U.K. Ltd.

Hedge funds and other large speculators increased net futures bets the yen will strengthen against the dollar to the highest level in a month, according to Commodity Futures Trading Commission data as of Aug. 9.

“The Bank of Japan is powerless, and their attempts to weaken the yen, for example a rate cut this year, have failed miserably,” Aurelija Augulyte, macro strategist at Nordea Markets in Copenhagen, said in an e-mail. She sees the long-term target for the yen at about 95 versus the dollar, and “there is no meaningful risk of intervention before that.”

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